A review of the Cayman Islands public pension system done in 2008 recommended that pension contributions made to some civil servants’ retirement savings plans be increased to nearly 45 per cent of their total salaries and emoluments.
The recommendation was made only for civil servants who participate in the government’s defined benefit pension plan; those that will receive a monthly pension payment after retirement. All civil servants participating in the defined contribution retirement plan would only need to increase their pension contributions by 1 per cent, according to actuaries – essentially going from the current 12 per cent of salary to 13 per cent.
“The actuary recommended that the basic 12 per cent employee/employer contribution rates be increased by 32.9 per cent for the defined benefit and 1 per cent for the defined contribution components of the plan,” read the statement on the 2008 actuarial evaluation contained in the Public Service Pensions Board 2010 annual report.
The 2008 actuaries’ report was completed in early 2009 but has never been officially released to the public. Lawmakers were thought to be releasing the evaluation this month, but as of press time that had not occurred.
Auditor General Alastair Swarbrick noted in his review of the pension board’s annual report for June 2010 that the actuarial evaluation – completed in March 2009, and given to Financial Secretary Ken Jefferson in April 2009 – had not been accepted and approved at that time.
“After receiving a report … the financial secretary shall submit the report to the governor and the governor shall either accept the report and approve, by regulations, the changes to the contribution rates recommended by the board; or within 90 days of receiving the report, cause its own actuarial valuation to be carried out, if it determines there is good reason to do so.”
Any recommendations to increase to 45 per cent of salary and emoluments the contributions to the defined benefit participants in the civil servants retirement plan would either require those contributions to come out of the workers’ salaries – which could mean a 39 per cent of salary contribution for defined benefit plan participants; or would require government to pay those costs on behalf of the workers.
Currently, government contributes 6 per cent of a civil servant’s salary above and beyond their normal pay to the retirement fund and civil servants match that contribution with a 6 per cent contribution of their own.
The reason for the huge recommended increase in payments into the civil servant retirement system is that the 2008 actuarial evaluation noted a significant unfunded liability within the plan.
“The actuarial valuation calculated a fund deficiency as at 1 January, 2008 of $192,310,713,” the pension system’s 2010 annual report noted.
The report calculated a past service liability within the fund of more than $435 million, while fund assets totalled $242.7 million. The report subtracted the fund assets from the liabilities to arrive at the $192 million unfunded liability figure.
An unfunded liability is not an exact amount that is due at present. Rather it is essentially a trained actuary’s best guess – based on data it is presented from the retirement fund – of how much will be owed toward employee retirements in a rolling 20-year period. The increased pension payments are recommended to help the investment funds “catch up” over that time.
“Fund deficiencies [unfunded liabilities] arise mainly as a result of participants having accrued considerable defined benefit entitlements prior to the establishment of the fund,” the pensions board noted. “Although the fund remains underfunded, the actuaries determined that the liability for inactive members [existing pensioners and beneficiaries, and those with deferred pensions] is sufficiently covered by available assets.”
The unfunded liability figure only includes civil servants who joined the government prior to 1 January, 2000. Any workers who were hired after that were placed on a defined contribution plan.
With the change from defined benefit to defined contribution plans for civil servants in 2000, the number of public servants linked to the unfunded liability became finite. In other words, no other government workers could join the defined benefit system and add to actuarial deficiencies.
No make-up payments
The unfunded liability gap has been made up in previous years partly by multimillion-dollar payments – averaging about $12 million to $14 million per year – for past service pension liabilities.
However, starting in the 2009/10 budget year, and continuing in the current fiscal year, the Cayman Islands government has cut payments into that past service pension allotment to less than $2 million per year in its proposed budget and has ended some years not making any payments at all.
Premier McKeeva Bush has suggested that if the rolling liability period in the government pension plan was extended to 30 years – as has been done with many public sector pension systems – Cayman’s public sector pension liabilities might actually decrease.
Deputy Financial Secretary Sonia McLaughlin said back in 2010 that government couldn’t afford to maintain the higher payments toward past pension liabilities in the current financial environment.
Employment Minister Rolston Anglin, who has responsibility for national pensions, has previously said that Cayman Islands law does not require specific amounts to be paid toward past service pension liabilities. However, he acknowledged that those amounts would eventually have to be paid in future years to make good on commitments to public sector retirees.
Judges and lawmakers
Actuaries also reviewed investment figures for retirement plans maintained on behalf of Cayman Islands lawmakers and judges, which are also managed by the public service pensions system.
The parliamentarian pension plan – for local lawmakers – had an unfunded liability as of 1 January, 2008 of $14.7 million. Its total assets were valued at $4.7 million while past service liabilities were estimated at $19.4 million.
The report calculated a “normal cost” contribution rate of 27.46 per cent of salary and emoluments to fund the cost of benefits in the 2009/10 budget year with allowances to pay future projected costs. However, it recommended an additional contribution rate of 76.6 per cent – bringing the total recommended contribution to 104 per cent when both active [working] and inactive [retired] lawmakers were considered.
The judicial pensions plan had a modest investment surplus as of 1 January, 2008. It included some $1.9 million in assets and $1.88 million in liabilities.